GenuineVC David Beisel's Perspective on Digital Change

“At the heart of the issue is that different VCs are managing different sized funds – so the appetite for how much capital they would like to invest in a company over its lifetime varies accordingly… In determining if a venture firm is a good fit for an entrepreneur (and vis versa), every first meeting should include a brief discussion about fund size, typical initial investment size, and the magic number of how much the VC would ideally like to deploy over the life of a company.”

Two interesting related blogs entries surfaced (to me) since then about this subject that I thought are worth highlighting. The first, Jeff Bussgang’s piece “Size Matters” adds some additional color and historical perspective to topic,

“…a critical thing for an entrepreneur when fundraising is to find a firm that’s going to fit their capital profile. After all, if a VC is trying to force too much money down the entrepreneur’s throats, it will mean more dilution than they’d like. And not having deep pockets means there’s a risk of getting caught short just at the moment when a few extra million might be needed to get to the next level. Thus, the Goldilocks Rule applies to VCs and fund size: not too big, and not too small, but just right.”

In addition, Jeff clarifies that it is the size of the current fund that actually matters in how much capital that a VC would ideally deploy,

“The nature of that sweet spot comes down to the size of their current fund, not their total capital under management, for all the reasons discussed above. Thus, always ask a firm what their current fund size is, not what they have under historical management.”

The second related piece was written by Christian Mayaud, in which he argues that not only is there a magic number for VCs, but also a magic number for entrepreneurs. They will act differently in the face of risk depending on their progress to date in achieving an ideal “magic” net worth number,

“If you look at the professional life of a typical successful entrepreneur, their ability to tolerate personal risk varies over time… [It is] something an entrepreneur should become conscious of because his personal risk tolerance profile will color his judgement over the lifetime of his career… Young recent college graduates behave differently from middle-aged first time entrepreneurs, serial entrepreneurs behave differently from first-time entrepreneurs, senior managers behave differently than founders, etc., etc. — in part, due to the existence of their Personal Risk Tolerance Curves and where they are along them.”

The question I would raise is if an entrepreneur’s (or anyone’s for that matter) magic net worth number shifts over time. I agree that an inexperienced entrepreneur may see things differently than one who has a few successes under his or her belt, but don’t those successes broaden the view of what is in fact potentially achievable? Moreover, I would also maintain that entrepreneurs specifically are not just driven by extrinsic motivations, but also by intrinsic ones as well. There are often deeper reasons than financial ones why an entrepreneur – especially a serial entrepreneur – is willing to take significant risks with both his/her private wealth and career. To overlook those considerations is simplifying the issue to a certain degree. That being said, Christian is correct in stating that VCs should and do bear in mind an entrepreneur’s situation when assessing an investment opportunity.